REPORT OF WHISTLEBLOWER INVESTIGATION DEPARTMENT OF SOCIAL AND HEALTH SERVICES REGION 5 NO.

08-002 MARCH 31, 2008 Notice of Filing and Transmittal March 31, 2008 Attached is the official report on whistleblower case No. 08-002 at Department of Social and Health Services, Division of Children and Family Services, Region 5. The State Auditors Office received assertions of improper governmental activity at the Department of Social and Health Services, Region 5. These assertions were submitted to us under the provisions of Chapter 42.40 of the Revised Code of Washington, the Whistleblower Act. We have investigated the assertions independently and objectively through interviews and by reviewing relevant documents. This report contains the result of our investigation. Questions about this report should be directed to Senior Investigator LaRene Barlin at (360) 902-2213, or Director of Special Investigations Jim Brittain at (360) 902-0372. BRIAN SONNTAG, CGFM STATE AUDITOR BS:lcb cc: Kathleen Brockman, Chief Administrative Officer Ginny Heim, Special Assistant, Childrens Administration Nancy Sutton, Regional Administrator, Region 5

ABOUT THE ENTITY The Department of Social and Health Services mission is to improve the quality of life for individuals and families in need. The Department works to help people achieve safe, self- sufficient, healthy and secure lives. The Department spends approximately $9 billion a year, which represents approximately one-third of the state budget. It has more than 18,000 employees. The Agency receives approximately 49 percent federal funds, 46 percent state funds and 5 percent other sources. Based on the most recent data available, every two years the Department serves one in approximately 1.5 million people, including children and youth. The Department is divided into five administrations: Health and Recovery Services, Economic Services, Aging and Disability Services, Juvenile Rehabilitation Services and Childrens Services. The Health and Recovery Services Administration, which includes the Medicaid Program, accounts for over half of the Departments total budget. ABOUT THE INVESTIGATION We received whistleblower assertions that two Region 5 employees improperly spent state funds designated for the benefit of children in foster care on merchandise not related to foster care. ASSERTIONS AND RESULTS 1. A Supply Control Technician, Region 5, improperly spent state funds when she prepared and/or copied purchase orders and purchased miscellaneous merchandise not intended for foster children. 2. Regional Business Manager, Region 5, improperly spent state funds when he knew about and/or approved purchase orders for the purchase of miscellaneous items not intended for foster children.

We found no reasonable cause to believe an improper governmental action occurred as to the subjects in both assertions because they were instructed by the regional administrator to spend the money. However, we are unable to determine if the items purchased and received are accounted for in the inventory system. We also found Region 5 employees spent at least $175,963.60 in 18 days in May and June 2007. We have communicated our concerns regarding lack of internal controls related to disbursements, purchasing, ordering, receiving and inventory to the Team that audits the Department. As part of our investigation, we reviewed 78 purchase orders, security logs, a lease, inventory lists and emails. We interviewed witnesses and toured facilities in Tacoma and Bremerton where the purchased items were stored. Witnesses stated that a meeting in Olympia at the end of April or beginning of May, 2007 was attended by the regional administrators, area administrators, managers, supervisors, business managers and Olympia personnel. At this meeting the regions were reminded by the Chief of the Finance Division that if they had under-spent foster care program money, they were to spend it by the end of the fiscal year June 30, 2007. After the meeting, as detailed below, two Region 5 employees purchased items such as cribs, mattresses, bunk beds, clothes, toiletries, hair care products, DVDs, baby items, shoes, fire extinguishers and other items to be used in the foster care program. When we evaluated the 78 purchase orders, we found: Three were for $3,200 which exceeded the $3,100 allowed for purchase orders. Forty-nine were for $3,000. For seven purchases, the amount spent exceeded the amount on the purchase order. One purchase order was issued for $544.50. The amount spent was $3,228.19. One duplicate payment of $544.00 to a vendor; The error was discovered and the duplicate payment was cancelled. No supporting documentation such as packing slips, customer receipt of sales or order confirmation for two purchases totaling $6,513.72. Region 5 was charged and paid $80 for a silk screen set-up charge for a service it did not request or receive. Vendor used a purchase order number twice. The Regions fiscal division discovered the error and new purchase order was issued. When asked why so many purchase orders were prepared for $3,000, the technician stated that was their dollar limit. When asked why the Region did not secure three bids as required by law, the technician stated the Region did not have time to do this by June 30, 2007. The technician stated this kind of purchasing occurs every year. We further evaluated the purchase orders for compliance with state bid laws. Agencies have delegated authority to make purchases up to $3,100, excluding sales tax and freight, without soliciting competition. Agencies cannot split purchases to avoid this bid amount. Multiple transactions in a single day would be considered one event and be subject to the $3,100 limit. Special consideration is given for going over the bid amount if market conditions prevent open and effective competition. It does not appear that applies to this situation. Above $3,100, the agency must obtain three bids to ensure a competitive process. The agency must document this competitive process for audit purposes. It appears that Region 5 intentionally split the purchase orders to circumvent the $3,100 threshold requirement.

Examples of circumventing the state bid law by using separate purchase orders for multiple purchases at the same store on the same day are listed below: DATE June 19, 2007 STORE Retail Store TIME 4:55 pm 5:07 pm 5:15 pm 8:34 pm 8:35 pm 8:36 pm 8:37 pm 8:37 pm 8:38 pm 12:32 pm 12:58 pm 1:15 pm 1:31 pm 1:42 pm 2:02 pm 2:14 pm 1:12 pm 1:34 pm 2:20 pm 2:54 pm 3:31 pm unknown 1:30 pm 3:04 pm 4:56 pm 5:39 pm 9:11 am 9:41 am 8:02 pm 9:09 pm 9:17 pm AMT SPENT 3,266.54 3,267.09 3,270.40 3,197.12 3,251.78 3,197.57 3,251.07 3,251.67 3,251.67 3,241.67 3,263.35 3,067.74 3,263.73 3,263.73 3,045.96 2,936.62 3,241.22 3,228.19 3,199.25 3,244.23 3,328.63 2,422.66 3,249.83 3,247.27 531.84 3,265.68 3,147.69 3,100.75 1,318.92 3,483.67 924.46 TOTAL

9,804.03

June 20, 2007

Retail Store

19,400.88

June 23, 2007

Retail Toy Store

22,082.80

June 28, 2007

Retail Toy Store

18,664.18

June 29, 2007

Retail Store

10,294.62

June 30, 2007

Retail Store

11,975.49

We reviewed the agencys inventory report on the items purchased. We found a lack of controls over what is placed in and/or removed from the Tacoma warehouse. Large items such as cribs, mattresses, high chairs, booster seats, bunk beds, dressers, etc. were given an inventory bar code number. We could not find records for, and the agency could not account for consumable inventory such as clothes, DVDs, toiletries, shoes, diapers, duffle bags, fire extinguishers and other smaller items. Further, the inventory list that was given to the Auditors Office shows two bar code numbers were used twice and some numbers were missing from the list. In addition, witnesses stated items were shipped to the Bremerton Field Office storage facility from the Tacoma warehouse. The inventory list does not state which items. We found no segregation of duties. One person prepared the purchase orders, purchased items, received them and brought them back to the office. No independent verification was done to determine what was purchased, received, inventoried or given to foster children.

Upon being advised of this situation, the Region 5 Business Manager reviewed the purchasing process and put new procedures in place. AGENCYS RESPONSE This letter is to acknowledge receipt of Whistleblower Report No. 08-002. I appreciate the thoroughness and objectivity of the report. Although there was no reasonable cause found regarding the assertions, there was information regarding a lack of internal controls relating to purchasing and inventory. I have instructed the Childrens Administration (CA) to proceed with a Corrective Action Plan to address the issues identified in the report. CA has begun planning to develop a plan with the CA Regional Business Managers. The plan will apply to all regions, resulting in consistent application of all new procedures across the regions. There will also be a monitoring plan to ensure that the procedures are in place and being used in all regions. AUDITORS CONCLUDING REMARKS We thank Department officials and personnel for their assistance and cooperation during the investigation. INVESTIGATION CRITERIA We came to our determination in this investigation by evaluating the facts against the criteria below: Assertions 1 and 2: RCW 42.52.160 Use of persons, money, or property for private gain. (1) No state officer or state employee may employ or use any person, money, or property under the officers or employees official control or direction, or in his or her official custody, for the private benefit or gain of the officer, employee, or another. RCW 43.19.1906(2) Competitive bids Procedure Exceptions. Insofar as practicable, all purchases and sales shall be based on competitive bids,. . . (2) Purchases . . . . Quotations from three thousand dollars to thirty-five thousand dollars, or subsequent limits as calculated by the office of financial management, shall be secured from at least three vendors to assure establishment of a competitive price and may be obtained by telephone or written quotations, or both . . . .A record of competition for all such purchases from three thousand dollars to thirty-five thousand dollars, or subsequent limits as calculated by the office of financial management, shall be documented for audit purposes. . . . Beginning on July 1, 1995, and on July 1 of each succeeding odd-numbered year, the dollar limits specified in this section shall be adjusted as follows: The office of financial management shall calculate such limits by adjusting the previous bienniums limits by the appropriate federal inflationary index reflecting the rate of inflation for the previous biennium. Such amounts shall be rounded to the nearest one hundred dollars. However, the three thousand dollar figure in subsections (2) and (8) of this section may not be adjusted to exceed five thousand dollars. SAAM Chapter 20.20.20.a. Each agency director is responsible for establishing and maintaining an effective system of internal control through the agency. 20.20.70. There should be segregation of duties. Duties are divided, or segregated, among different people to reduce the risk of error or inappropriate actions. For example, responsibilities for authorizing transactions, recording them, and handling the related assets should be separated.

SAAM Chapter 35.10. The policies and procedures in this chapter are the minimum requirements for inventories that state agencies must meet. An agency may maintain its inventory system in greater detail, or use additional supporting documentation, as long as the agency meets the required minimum standards. 35.10.40.b Consumable inventories must be physically counted, valued, and recorded when balance on hand at an inventory control point exceeds $25,000. The agency inventory officer is responsible for developing and implementing procedures for recording inventory additions as received and reductions as used. The physical inventory, or inventory count, should be performed by persons with no direct responsibility (custody and receipt/issue authority) for the inventory. If it is not feasible to use such personnel for any part of the inventory, those parts are, at least, to be tested and verified by a person with no direct responsibility for the stock. 35.10.70 Retaining inventory records. The inventory reconciliation and certification must be retained by the agency as documentary support for its inventory. The agency should retain this documentation in accordance SAAM Chapter 85.32 states that it is the agencys responsibility to certify that all expenditures and disbursements are proper and correct. 85.32.20. Prior to payment authorization, agencies are to verify that authorized personnel have received the goods. 85.32.30. Payment processing requires at a minimum proper documentation for the purchase, receipt of goods and approval for payment.